19 March 2008 External T.I. 2008-0269301E5 - Securities transactions - 39(4) election

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Whether the election pursuant to subsection 39(4) of the Income Tax Act is available to an individual.

Position: General comments

Reasons: Based on comments in IT-479R

XXXXXXXXXX 							2008-026930
L. Carruthers, CA
March 19, 2008

Dear XXXXXXXXXX :

Re: Securities Transactions

This is in response to your letter of February 25, 2008, inquiring about the availability of an election pursuant to subsection 39(4) of the Income Tax Act (the "Act"), for someone in your circumstances. You indicated that you extensively buy and sell common shares of Canadian companies and you usually hold them for a short period of time.

Our Comments

The situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advanced income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, Advanced Income Tax Rulings, dated May 17, 2002. This Information Circular and other CRA publications can be accessed on the internet at http://www.cra-arc.gc.ca. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. A list of TSOs is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following general comments, which may be of assistance.

The CRA's general comments on security transactions can be found in Interpretation Bulletin IT-479R, Transactions in Securities, which generally discusses the tax treatment of securities transactions. As explained in paragraph 2 of the bulletin, where a security that is traded qualifies as a "Canadian security", it may be possible for a taxpayer, who files an election under subsection 39(4) of the Act, to treat all gains and losses from Canadian securities on capital account. A special election form, T123, is available for use by a taxpayer when making an election under subsection 39(4).

However, pursuant to subsection 39(5) of the Act, this election is not available to certain taxpayers such as traders or dealers in securities. In the court case of Vancouver Art Metal Works Limited v. the Queen (93 DTC 5116), the Federal Court of Appeal indicated that the expression "trader or dealer in securities" refers to anyone who carries on a business of trading or dealing in securities, not only to brokers or professionals registered or licensed. This expression refers to anyone who is professionally engaged in the business of dealing in securities or when his dealings amount to carrying on a business and can no longer be characterized as investor's transactions or mere adventures or concerns in the nature of trade.

If an individual's course of conduct indicates that in securities transactions, the individual is disposing of securities in a way capable of producing gains, with that object in view, and the transactions are of the same kind and carried on in the same fashion as a trader or dealer in securities, the individual would generally be considered to be carrying on a business with respect to his or her securities transactions, such that the election pursuant to subsection 39(4) of the Act would not be available. Some of the factors to be considered in ascertaining whether a taxpayer's conduct indicates the carrying on of a business are listed in paragraph 11 of IT-479R and are as follows:

(a) frequency of transactions - a history of extensive buying and selling of securities or a quick turnover,

(b) period of ownership - securities are usually owned for only a short period of time,

(c) knowledge of the securities market - the taxpayer has some knowledge of or experience in the securities markets,

(d) security transactions form a part of the taxpayer's ordinary business,

(e) time spent - a substantial part of the taxpayer's time is spent studying the securities market and investigating potential purchases,

(f) financing - security purchases are financed primarily on margin or some form of debt,

(g) advertising - the taxpayer has advertised or otherwise made it known that he is willing to purchase securities, and

(h) in the case of shares, their nature - normally speculative in nature or of a non-dividend type.

Furthermore, as noted in paragraph 12 of IT-479R, although none of the individual factors listed above may be sufficient to characterize the activities of a taxpayer as a business, the combination of a number of those factors may well be sufficient for that purpose.

The determination of whether a particular taxpayer carries on a business of trading or dealing in securities is, therefore, a question of fact which can only be determined following an assessment of all the facts relating to the particular taxpayer's circumstances.

As noted above, given your situation involves a specific taxpayer and completed transactions, in order to receive a definitive response regarding whether you are carrying on a business of trading or dealing in securities, you should submit all relevant facts and documentation to your TSO for their views.

We trust that these comments will be of assistance.

Yours truly,

R.A. Albert, CA
For Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate